University of Missouri Debt Policy

Policy Statement

The University intends to maintain a debt rating that ensures adequate funding for University capital projects and provides ready access to the capital markets at attractive rates relative to market conditions then existing. It is understood that higher credit ratings provide market access at lower interest rates but also limit the amount of debt that may be issued.

The Board of Curators sets policy regarding debt. The board delegates authority to implement the policy to the Vice President for Finance.

Goals of Issuing Debt

to match the cost of funding with the benefits received over the useful life of capital improvements;

to leverage other capital funding sources, such as preserving cash for building financial flexibility and funding short-term capital and operating needs and matching state, federal and private funding; and

as needed, to meet short-term operating or emergency cash flow needs.

Debt Capacity and Capital Planning

Issuance of debt is subject to the university’s overall debt capacity. Annually, in concert with the budget process, the Office of the Vice President for Finance will determine university debt capacity pursuant to target debt ratings. Capacity will be utilized in the capital planning process to determine the aggregate dollar value of projects that can be funded with debt in any given year. Limited debt capacity dictates that capital spending will be prioritized and incorporated in the capital planning process.

To maintain cost effective access to debt capital markets, the university is committed to maintaining a credit rating in the AA category or above, as determined by Moody’s Investors Service and/or Standard & Poor’s. The university will target certain financial ratios as the benchmark for maximum debt level. These include:

Unrestricted Financial Resources to Direct Debt

Actual Debt Service to Operations

University System Debt Service Coverage

System Facilities Debt Service Coverage

The university will strive to attain the highest rating possible given the desired trade-off between capital project funding needs and cost of capital.

Use of Long-Term Funding

The university will utilize long-term debt, primarily in the form of tax-exempt bonds, to finance long-term assets. The university will issue debt for capital projects with a dependable long-term source of revenue available for payment. Debt may only be issued for facilities that may be financed pursuant to state statutes governing university debt borrowings. Debt financings will be coordinated to the extent practical to include multiple project needs in a single borrowing to reduce costs of issuance.

Use of Short-Term Funding

The university will utilize short-term funding, primarily capital project notes or commercial paper, for short-term funding needs, such as working capital, investing cash most efficiently, and providing interim funding for capital projects (primarily early design costs) until long-term debt is issued. Short-term borrowing will be repaid prior to the end of each fiscal year and will not be accounted for as a liability on the university’s balance sheet at the end of any fiscal year.

Use of Off-Balance Sheet Financing

The university will consider off-balance sheet financing when it is desirable to work with a third party, for risk sharing, and for leasing. The university will consider the impact of such financing on its debt ratios as if the financing must be included on the university’s balance sheet.

Use of Derivatives

The use of derivatives must be approved by the Board of Curators and will be for the purpose of reducing interest rate risk. Only counter parties with ratings of “AA” or better at the time of a transaction will be used. If, after the transaction, the counter party is downgraded, the relationship will be subject to immediate review. Any derivative contract will require the counter party to collateralize its obligation if its outstanding credit rating falls below “A”. The university will diversify its exposure to counter parties. At no time should multiple derivative contracts be in place with the same counter party.

Use of Floating-Rate versus Fixed-Rate Debt

The university will limit floating-rate debt to a maximum range of 30% to 50% of its outstanding indebtedness. The university will utilize floating-rate debt capacity primarily during periods of high interest rates. At any time 30-year fixed-rate financings can be assumed at a true interest cost of less than 5%, fixed-rate debt will be favored.

It is further recognized that it may be appropriate to utilize floating-rate debt during the construction and start-up period of a project to reduce capitalized interest expense.

Debt Structure

Collateral: Auxiliary System Facilities revenues will be pledged for System Facilities Bonds and Health System Facilities will be pledged for Health Facilities Bonds. There will be no cross collateralization.

Maturity of Indebtedness: The maturity of the debt issued will be determined by the purpose of the financing. In general, the maturity of the debt will not exceed the useful life of the assets being financed and debt service will be approximately level each year. Debt service will not exceed the expected revenues to be used to pay debt service.

Interest Rates: Interest rate structure will be determined by market conditions at issuance. In most cases, the University will issue fixed rate debt that is expected to be repaid from fixed fees and charges. Variable rate debt will be considered when interest rates are high and it is not advantageous to lock in long-term fixed rates or other times when variable rate debt significantly benefits the university.

Refunding Bonds: The university will issue current and advance refunding debt when material present value savings can be obtained.

Redemption Provisions: The university will seek redemption provisions that are equal to or better than the market.

Credit Enhancement: The university will consider credit enhancement when it materially lowers the cost of debt and does not require material additional debt and operating covenants by the university.

Methods of Sale

Negotiated Sales will generally be used to sell bonds. Underwriter’s will be selected through a competitive request for proposal (RFP) process. The RFP process provides for a competitive underwriter’s discount while retaining flexibility in timing of debt issuance.

Competitive Sales will be used when the university believes it may yield more competitive pricing than a negotiated sale and flexibility in the timing of debt issuance is not as important.

Private Placements will be considered for debt issuance where the size is too small or the structure is too complicated or not appropriate for a public debt issuance.

Taxable Debt

The university may use taxable debt for projects that cannot be financed using tax-exempt debt. The university will allocate its capital funding sources in a manner that will minimize the need for taxable debt to keep its cost of borrowing as low as possible. The issuance of taxable debt will require Board approval.

Reporting to Board

The Office of the Vice President for Finance will annually present a report to the Board of Curators on debt issued, debt outstanding, the university’s estimated debt capacity and credit ratings.